Energy Policy Act: Including Propane as an Alternative Motor Fuel Will
Have Little Impact on Propane Market (Letter Report, 09/24/98,
GAO/RCED-98-260).
Pursuant to a congressional request, GAO determined whether and how
including propane as an alternative fuel under the Energy Policy Act of
1992 (EPACT) will affect existing propane consumers as well as the
supply and price, focusing on: (1) whether EPACT's goal of replacing at
least 10 percent of the conventional fuel used in light-duty vehicles by
2000 and at least 30 percent by 2010 with replacement fuels will be
achieved; (2) the extent to which the use of propane as a motor fuel
will increase as a result of EPACT; (3) the impact the use of propane as
a motor fuel under EPACT will have on the supply and price of propane;
and (4) the impact the use of propane as a motor fuel under EPACT will
have on existing users of propane.
GAO noted that: (1) it is unlikely that the goal of EPACT of replacing
at least 10 percent of the conventional fuel used by light-duty vehicles
in the United States by 2000 and at least 30 percent by 2010 with
replacement fuels will be achieved; (2) GAO estimates, based on the
Energy Information Administration's (EIA) modeling, that alternative
fuels will account for less than 1 percent in 2000 and about 3.4 percent
in 2010 of the total motor fuel projected to be consumed by light-duty
vehicles; (3) the act's focus on the acquisition of alternative-fueled
vehicles rather than on the use of alternative fuels, high
alternative-fueled vehicle costs, low gasoline prices, and an inadequate
refueling infrastructure for these vehicles are factors hindering the
increased use of alternative fuels for transportation; (4) EPACT can be
expected to lead to a small increase in the use of propane as an
alternative fuel in the transportation sector; (5) GAO estimates that
after the vehicle acquisition mandates in the act are factored in,
consumption of propane as a motor fuel will account for about 1.5
percent of the total propane used in the United States in 2000 and about
5.1 percent in 2010; (6) the effects of EPACT on the supply and price of
propane will be minimal; (7) incremental domestic production of propane
as a result of the act will be about 7,000 barrels per day in 2000 and
85,000 in 2010; (8) according to the EIA, these levels of domestic
production will satisfy most of the estimated additional propane demand
caused by the act; (9) GAO estimates that the increase in the overall
price of propane attributable to the act will be a negligible 0.17 cent
per gallon in 2000 and 3.28 cents per gallon in 2010; (10) similarly,
EPACT will have little impact on the existing consumers of propane
because the price increases will be so small; (11) GAO estimates that
propane prices paid by residential and industrial consumers will
increase by an average of just 0.10 cent per gallon in 2000, while the
prices paid by transportation consumers will increase by about 0.43 cent
per gallon; and (12) GAO projects that in 2010, price increases due to
the act will be, on average, 1.50 cents per gallon for the residential
sector, 1.70 cents per gallon for the industrial sector, and 2.33 cents
per gallon for the transportation sector.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-98-260
TITLE: Energy Policy Act: Including Propane as an Alternative
Motor Fuel Will Have Little Impact on Propane Market
DATE: 09/24/98
SUBJECT: Motor vehicles
Alternative energy sources
Petroleum legislation
Petroleum industry
Fuel research
Projections
Gasoline
Natural gas
Energy legislation
Natural gas prices
IDENTIFIER: National Energy Modeling System
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Cover
================================================================ COVER
Report to Congressional Requesters
September 1998
ENERGY POLICY ACT - INCLUDING
PROPANE AS AN ALTERNATIVE MOTOR
FUEL WILL HAVE LITTLE IMPACT ON
PROPANE MARKET
GAO/RCED-98-260
Energy Policy Act
(141153)
Abbreviations
=============================================================== ABBREV
AFV - alternative-fueled vehicle
DOE - Department of Energy
E85 - ethanol 85
EIA - Energy Information Administration
EPACT - Energy Policy Act of 1992
GAO - General Accounting Office
M85 - methanol 85
MY - model year
OPEC - Organization of Petroleum Exporting Countries
NEMS - National Energy Modeling System
Letter
=============================================================== LETTER
B-280779
September 24, 1998
The Honorable Dale Bumpers
The Honorable Tom Daschle
United States Senate
The Honorable Marion Berry
House of Representatives
The transportation sector is projected to consume about 70 percent of
the petroleum to be used by the United States in 2010, up from about
66 percent in 1996, according to estimates by the Department of
Energy's (DOE) Energy Information Administration (EIA).\1
Furthermore, EIA projects that imports will supply 60 percent of the
total U.S. oil consumption in 2010, up from about 46 percent in
1996. In part, to help reduce the nation's oil dependence and oil
imports, the Congress passed the Energy Policy Act of 1992 (EPACT).
Title V of EPACT requires the Secretary of Energy to establish a
program to promote the development and use of domestically produced
replacement fuels in light-duty vehicles.\2 A major goal of EPACT is
to replace a portion of the motor fuel (conventional fuel) used by
light-duty vehicles in the United States with what are termed
replacement fuels.\3 The act also stipulates that at least half of
the replacement fuels should be produced in the United States.
Included among the fuels defined by EPACT as alternative or
replacement fuels\4 is liquified petroleum gas, or propane.\5
Propane is widely used for other purposes. The petrochemical
industry, for example, by far the largest propane consumer, uses
propane in its manufacturing processes, and the residential sector
uses propane for heating and other household purposes. Some of these
traditional users of propane have expressed concern that the
achievement of EPACT's fuel-replacement goal could lead to rapid
future growth in the demand for propane, resulting in higher propane
prices. This report responds to your request that we determine
whether and how including propane as an alternative fuel under EPACT
will affect existing propane consumers as well as the supply and
price. Specifically, this report addresses the following questions:
(1) How likely is it that EPACT's goal of replacing at least 10
percent of the conventional fuel used in light-duty vehicles by 2000
and at least 30 percent by 2010 with replacement fuels will be
achieved? (2) To what extent will the use of propane as a motor fuel
increase as a result of EPACT? (3) What impact will the use of
propane as a motor fuel under EPACT have on the supply and price of
propane? (4) What impact will the use of propane as a motor fuel
under EPACT have on existing users of propane? In order to respond
to these questions, we asked EIA to use its National Energy Modeling
System to estimate the likelihood of achieving EPACT's
fuel-replacement goal and to estimate the potential impacts.\6
--------------------
\1 In its Annual Energy Outlook 1998, EIA projects that almost 23
million barrels per day of petroleum will be used by the United
States in 2010.
\2 Light-duty vehicles include cars and light trucks.
\3 In this report, conventional fuel refers to gasoline and diesel
fuel.
\4 As defined by EPACT, replacement fuels are the portion of any
motor fuel that is methanol, ethanol, or other alcohols; natural gas;
liquified petroleum gas; hydrogen; coal-derived liquid fuels; fuels
(other than alcohol) derived from biological materials; electricity
(including electricity from solar energy); ethers; or any other fuel
that DOE determines, by rule, is substantially not petroleum and
would yield substantial energy security and environmental benefits.
\5 Liquified petroleum gas is mainly propane but includes some butane
as well. In this report, we refer to liquified petroleum gas simply
as propane.
\6 The National Energy Modeling System is a large-scale computerized
model designed by EIA to assist policymakers and the public in
assessing the impact of various policy initiatives.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
It is unlikely that the goal of the Energy Policy Act of 1992 of
replacing at least 10 percent of the conventional fuel used by
light-duty vehicles in the United States by 2000 and at least 30
percent by 2010 with replacement fuels will be achieved. We
estimate, based on the Energy Information Administration's modeling,
that alternative fuels will account for less than 1 percent in 2000
and about 3.4 percent in 2010 of the total motor fuel projected to be
consumed by light-duty vehicles.\7
The act's focus on the acquisition of "alternative-fueled" vehicles
rather than on the use of alternative fuels, high alternative-fueled
vehicle costs, low gasoline prices, and an inadequate refueling
infrastructure for these vehicles are factors hindering the increased
use of alternative fuels for transportation.
The Energy Policy Act can be expected to lead to a small increase in
the use of propane as an alternative fuel in the transportation
sector. We estimate that after the vehicle acquisition mandates in
the act are factored in, consumption of propane as a motor fuel will
account for about 1.5 percent of the total propane used in the United
States in 2000 and about 5.1 percent in 2010.\8
The effects of the Energy Policy Act on the supply and price of
propane will be minimal. Incremental domestic production of propane
as a result of the act will be about 7,000 barrels per day in 2000
and 85,000 in 2010. According to EIA, these levels of domestic
production will satisfy most of the estimated additional propane
demand caused by the act. We estimate that the increase in the
overall price of propane attributable to the act will be a negligible
0.17 cent per gallon in 2000 and 3.28 cents per gallon in 2010.\9
Similarly, the Energy Policy Act will have little impact on the
existing consumers of propane because the price increases will be so
small. We estimate that propane prices paid by residential and
industrial consumers will increase by an average of just 0.10 cent
per gallon in 2000, while the prices paid by transportation consumers
will increase by about 0.43 cent per gallon.\10 We project that in
2010, price increases due to the act will be, on average, 1.50 cents
per gallon for the residential sector, 1.70 cents per gallon for the
industrial sector, and 2.33 cents per gallon for the transportation
sector.
--------------------
\7 According to a projection by EIA cited in a 1997 DOE report,
replacement fuels in the form of oxygenates could contribute an
additional 4.8 to 6.7 percent of light-duty vehicle motor fuel by
2010. See Replacement Fuel and Alternative Fuel Vehicle Technical
and Policy Analysis, DOE, Energy Efficiency and Renewable Energy,
Office of Transportation Technologies (July 1997).
\8 The use of propane by the transportation sector is projected to
increase by only about 0.01 quadrillion Btu in 2000 and by 0.10
quadrillion Btu in 2010 as a result of EPACT. A British thermal
unit, or Btu, is the heat required to raise the temperature of 1
pound of water by 1 degree Fahrenheit.
\9 All prices cited are in 1996 dollars.
\10 The petrochemical industry consumes most of the propane used in
the industrial sector.
BACKGROUND
------------------------------------------------------------ Letter :2
To help meet its goal of replacing a portion of the conventional fuel
used by light-duty vehicles in the United States with replacement
fuels, EPACT established mandates, to be implemented by the Secretary
of Energy, that require certain fleet operators to include
alternative-fueled vehicles (AFV) in their fleets. Specifically,
EPACT required that federal fleets acquire AFVs beginning in fiscal
year 1993 and that state fleets and alternative fuel providers
acquire AFVs beginning in model-year 1996.\11 The federal AFV fleet
program went into effect in 1993, but the mandates for state and
alternative fuel provider fleets were delayed until 1997 because,
according to a DOE official, the Department did not issue the
rulemaking, as required by EPACT, early enough for the mandates to
take effect in 1996. Also, under EPACT, the Secretary of Energy may
require municipal and private (business) fleets to purchase an
increasing percentage of AFVs to help meet the fuel-replacement goal.
Under EPACT, DOE published an advance notice of proposed rulemaking
in April 1998 and held public hearings in May and June 1998 to
determine whether the establishment of the municipal and private
fleet mandate is necessary and whether such a mandate will help
attain EPACT's fuel-replacement goal. EPACT does not require that
the goal be achieved and authorizes the Secretary of Energy to modify
the goal or the target years if he or she determines that they are
not achievable. Table 1 presents a summary of EPACT's AFV
acquisition mandates for the fleets covered by the act.
Table 1
EPACT Mandates
EPACT section Sector affected Mandates for new light-duty AFV acquisitions
------------------- ------------------ ------------------------------------------------
Section 303(a) Federal Acquisitions must total at least 5,000 AFVs in
fiscal year (FY) 1993, 7,500 in FY 1994, and
10,000 in FY 1995.\a
Section 303(b) Federal Acquisitions must total at least 25% in FY 1996,
33% in 1997, 50% in FY 1998, and 75% in FY 1999
and thereafter.\b
Section 501(a) Alternative fuel Acquisitions must be 30% for model year (MY)
providers 1996, 50% for MY 1997, 70% for MY 1998, and 90%
for MY 1999 and thereafter.\\\c,d
Section 507(o) State Acquisitions must be 10% for MY 1996, 15% for MY
1997, 25% for MY 1998, 50% for MY 1999, and 75%
for MY 2000 and thereafter.\e
Proposed mandate
-----------------------------------------------------------------------------------------
Section 507(g) Municipal and Pending rulemaking determination of need and
private (other feasibility, acquisitions must be 20% of the
than fuel AFVs for MY 2002, 40% for MY 2003, 60% for MY
providers) 2004, and 70% for MY 2005 and thereafter.\f\
-----------------------------------------------------------------------------------------
\a In April 1993, the President signed Executive Order 12844, which
increased light-duty AFV acquisition requirements by 50 percent for
1993-95. Thus, vehicle acquisition targets were changed to 7,500
AFVs for FY 1993, 11,250 for FY 1994, and 15,000 for FY 1995.
Executive Order 12844 was superseded by Executive Order 13031 of
December 13, 1996.
\b A federal fleet operator can acquire a smaller percentage than
mandated as long as the aggregate percentage of all federal fleets is
at least equal to the required percentage.
\c For model year 1997 and thereafter, the required percentages can
be reduced to no less than 20 percent in any one year. DOE also has
the option of rescheduling acquisition requirements up to 2 model
years.
\d Electric utilities that are covered by alternative fuel provider
mandates are excluded from the vehicle purchase mandates until after
December 31, 1997, with respect to electric motor vehicles.
\e Local and private fleets can voluntarily join with state fleets to
attain the mandated number of AFVs.
\f The required percentages can be reduced for any model year. DOE
also has the option of starting the acquisition schedule later than
model year 2002.
--------------------
\11 EPACT covers federal fleets of 20 or more vehicles that can be
centrally fueled and are located in a metropolitan statistical area
with a 1980 population of more than 250,000. For other than federal
fleets, EPACT covers fleets of 50 or more vehicles, of which at least
20 vehicles can be centrally fueled and are used primarily in a
metropolitan statistical area with a 1980 population of more than
250,000.
EPACT'S REPLACEMENT GOAL IS NOT
LIKELY TO BE ACHIEVED
------------------------------------------------------------ Letter :3
The goal of EPACT to replace 10 percent of the conventional fuel
consumed by light-duty vehicles by 2000 and 30 percent by 2010 with
replacement fuels is unlikely to be achieved. On the basis of EIA's
modeling analysis, we estimate that alternative fuels will account
for less than 1 percent of the total fuel to be consumed by
light-duty vehicles in 2000 and about 3.4 percent in 2010, even after
accounting for EPACT's provisions mandating that fleets acquire
AFVs.\12 Previous studies by DOE have also concluded that EPACT's
goal is unlikely to be achieved after implementing the fleet
acquisition mandates. Appendix I summarizes the results of several
previous studies by DOE and Oak Ridge National Laboratory.
Industry and DOE officials we talked with gave several reasons why
the consumption of alternative fuels by light-duty vehicles will fall
short of EPACT's replacement goal. First, EPACT mandates that fleets
acquire AFVs but does not explicitly require that those vehicles use
alternative fuels.\13 Consequently, according to industry officials,
some fleets meet their AFV requirements by purchasing vehicles
capable of using both gasoline and an alternative fuel (called
dual-fueled vehicles), but these vehicles are usually run on
gasoline. Moreover, both DOE and industry officials believe that
achieving EPACT's goal will require greater use of alternative fuels
by vehicles beyond those in the fleets covered by the act, a
development they believe is unlikely. For one thing, the high price
of AFVs discourages their use. For example, according to one
industry official, converting a conventional vehicle to run on
propane can cost over $3,500, while a manufacturer's AFV that runs on
propane can cost about $6,000 more than a conventional
gasoline-powered vehicle. In addition, the lower price of gasoline
discourages increased use of the higher priced alternative fuels.
Both DOE and industry officials said that the price of gasoline is
simply too low for the transportation sector to purchase significant
quantities of alternative fuels. (See fig. 1 for a comparison of
gasoline and propane prices, adjusted for inflation.) Finally, the
infrastructure needed to keep AFVs refueled is currently inadequate
to support the wide-scale use of AFVs that are not operated as
centrally fueled fleet vehicles. Industry officials told us that the
consumption of alternative fuels for transportation is too small to
justify any large-scale investment in this infrastructure.
Figure 1: Propane and Gasoline
Prices for the Transportation
Sector, (With EPACT) 1997
Through 2010
(See figure in printed
edition.)
Source: Annual Energy Outlook 1998, EIA.
--------------------
\12 EIA projected that light-duty vehicles will consume a total of
about 15 quadrillion Btu (quads) in 2000 and about 17.8 quads in
2010. See footnote 7.
\13 Only alternative fuel providers are required to operate their
AFVs with alternative fuels, except when operating in areas where the
appropriate alternative fuel is unavailable.
EPACT WILL LEAD TO A SMALL
INCREASE IN THE USE OF PROPANE
AS A TRANSPORTATION FUEL
------------------------------------------------------------ Letter :4
EPACT is expected to lead to a small increase in the use of propane
as a transportation fuel. After EPACT's AFV acquisition requirements
are accounted for, the resulting increase in transportation use will
represent only 0.4 percent of the total consumption of propane in
2000 and 3.2 percent in 2010.\14 As a result, consumption of propane
as a transportation fuel will account for about 1.5 percent of the
total propane used in the United States in 2000 and about 5.1 percent
in 2010. The effects of EPACT specifically on the consumption of
propane fuel by light-duty vehicles are summarized in table 2.
Table 2
Consumption of Propane by Light-Duty
Vehicles, 1997 Through 2010
(Quadrillion Btu per year)
Propane consumption
--------------------------------------
With EPACT's Without EPACT's
Year effects effects
------------------------------ ------------------ ------------------
1997 0.018 0.018
1998 0.020 0.020
1999 0.023 0.019
2000 0.028 0.018
2005 0.081 0.020
2010 0.140 0.036
----------------------------------------------------------------------
Sources: Annual Energy Outlook 1998 and special National Energy
Modeling System run, EIA.
Some industry and DOE officials told us that although propane has
certain attributes that could make it the alternative fuel of choice,
such as permitting a longer driving range than compressed natural
gas, the barriers cited previously--the high relative cost of AFVs,
the low price of gasoline, and the inadequate infrastructure for
refueling--still inhibit its use. In addition, it does not appear
that the propane industry will strongly promote the fuel as an
alternative vehicle fuel. Propane industry officials and others told
us that the industry lacks the internal cohesion necessary to promote
the use of propane as a transportation fuel. Some officials pointed
out that the history of the industry has been one of small-scale
suppliers that primarily serve the heating and other household needs
of residential customers. These suppliers do not necessarily want to
see propane become a major transportation fuel for fear that that
would erode their business. By comparison, DOE and industry
officials and other experts told us that the natural gas industry is
aggressively promoting compressed natural gas as an alternative
transportation fuel. A manufacturer of AFVs also told us that the
natural gas industry has been much more aggressive in pushing for the
increased manufacture of vehicles that run on its fuel than the
propane industry has.
--------------------
\14 Estimated propane consumption by all sectors increases from 2.70
quads to 2.71 quads in 2000 as a result of EPACT. In 2010, estimated
total consumption increases from about 3.03 quads to about 3.13
quads.
EPACT WILL HAVE VERY LITTLE
IMPACT ON THE SUPPLY AND PRICE
OF PROPANE
------------------------------------------------------------ Letter :5
Because EPACT is not expected to cause any significant increase in
propane demand, it will have very little impact on the supply and
price of propane. Any effects of EPACT on the supply and price of
propane are indirect, that is, are in response to any higher demand
its mandates might cause. Because EPACT will not cause much change
in the demand for propane, little change in the supply and price of
propane can be expected to result from EPACT's mandates. We estimate
that the additional U.S. production of propane that will result from
EPACT will be about 7,000 barrels per day in 2000 and 85,000 barrels
per day in 2010.\15 According to EIA's modeling results, these levels
of domestic production will satisfy most of the additional propane
demand or consumption caused by EPACT, while imports will satisfy the
rest.
Some propane users have expressed concern that EPACT could cause
imports to become a greater proportion of the U.S. propane supply.
We found evidence that U.S. propane imports will increase but not
because of EPACT. For instance, Purvin and Gertz, Inc., a consulting
firm specializing in analyses of the oil and gas industry, projects
that U.S. imports of propane will rise from about 179,985 barrels
per day in 1997 to about 264,400 barrels in 2000 and almost triple by
2010 to about 483,200 barrels (see fig. 2). As a percentage of the
total U.S. propane supply, imports will rise from about 14.5 percent
in 1997 to about 19 percent in 2000 and 28 percent in 2010, according
to the firm's estimates. However, Purvin and Gertz officials told us
that these increases in imports are unrelated to EPACT. The firm's
projections of both supply and demand for propane do not account for
EPACT because it believes its effects on the propane market will be
inconsequential.
Figure 2: U.S. Propane Supply
From Domestic Production and
Imports, 1997 Through 2010
(See figure in printed
edition.)
Source: The North American NGL Industry--Opportunities in an
Expanding Market, Purvin and Gertz, Inc. (1997).
We estimate, based on EIA's modeling, that the effect of EPACT on the
overall price of propane will be negligible: an increase of 0.17
cent per gallon in 2000 and 3.28 cents per gallon in 2010 (fig. 3
shows the average price of propane, in 1996 dollars per million Btu,
with and without EPACT's effects, from 1997 through 2010). Table 3
presents the estimated price impacts of EPACT on three categories of
U.S. consumers. The estimated price increase effects for
residential consumers will be only 0.10 cent per gallon in 2000 and
1.50 cents per gallon in 2010; the increase for industrial consumers
is estimated to be 0.10 cent per gallon in 2000 and 1.70 cents per
gallon in 2010; and the increase for transportation consumers is
estimated at 0.43 cent per gallon in 2000 and 2.33 cents in 2010.\16
In addition, Purvin and Gertz officials believe that the U.S. market
will become the destination for a large share of the increased
propane production from natural gas fields being discovered in many
parts of the world, which could lead to lower prices.
Figure 3: Average Price of
Propane With and Without
EPACT's Effects, 1997 Through
2010
(See figure in printed
edition.)
Sources: Annual Energy Outlook 1998 and special National Energy
Modeling System run, EIA.
Table 3
Propane Price Increases Resulting From
EPACT, 1997 Through 2010
(1996 cents per gallon)
Transportati
Year Residential Industrial on
---------------------------- ------------ ------------ ------------
1997 0.00 0.00 0.00
1998 0.00 0.00 0.00
1999 0.00 0.00 0.17
2000 0.10 0.10 0.43
2001 0.00 0.00 0.52
2002 0.10 0.10 0.78
2003 0.30 0.20 1.12
2004 0.40 0.50 1.29
2005 0.40 0.50 1.47
2010 1.50 1.70 2.33
----------------------------------------------------------------------
Source: Special National Energy Modeling System run, EIA.
--------------------
\15 This projected increase in U.S. propane production is expected
to come from refinery production. According to EIA analysts, the
effect of EPACT would not be sufficient to cause natural gas
processing plants to increase their production because overall
natural gas production would likely not be affected. Industry
officials and experts believe that in the future, natural gas
processing will supply a large share of the propane produced in the
United States, even a greater share than that of the propane produced
by refineries.
\16 The average U.S. price for propane, with EPACT's effects
considered, is projected to be 61.5 cents per gallon in 2000 and 69.8
cents per gallon in 2010. For residential consumers, the projected
average price is 99.8 cents in 2000 and $1.07 in 2010. For
industrial consumers, the projected average price is 51.6 cents per
gallon in 2000 and 58.4 cents per gallon in 2010, while the projected
average price for the transportation sector is $1.10 per gallon in
2000 and $1.15 per gallon in 2010. According to an EIA official, the
differences in the projected average sectorial prices reflect such
factors as taxes for the transportation sector and lower costs for
high-volume customers in the industrial sector. The official also
pointed out that there may be regional differences in the projected
average sectorial prices.
EPACT WILL HAVE NO DISCERNIBLE
ADVERSE EFFECT ON EXISTING
PROPANE CONSUMERS
------------------------------------------------------------ Letter :6
Existing consumers of propane, such as residential and petrochemical
users, are not expected to be adversely affected by EPACT because the
act is expected to have a negligible effect on propane prices. EPACT
would cause a measurable adverse impact on existing propane consumers
if it significantly increased the demand for propane as a
transportation fuel and drove up its price. But, as previously
discussed, demand and price are not likely to rise significantly
given the limited effects of EPACT's mandates for fleets. DOE, EIA,
and most of the industry officials and experts we talked with believe
that the price effects of EPACT will be negligible and that propane
consumption by nontransportation sectors will not be affected by
EPACT. Figure 4 presents projections, based on EIA's modeling, for
the consumption of propane by various U.S. end-use sectors,
including the transportation sector, after factoring in the impact of
EPACT.
Figure 4: U.S. Propane
Consumption by Sector With
EPACT's Effects, 1997 Through
2010
(See figure in printed
edition.)
Source: Annual Energy Outlook 1998, EIA.
These projections are in contrast to those of a previous DOE study
that investigated what might happen if alternative fuels, AFVs, and a
refueling infrastructure were available on a widespread basis, a
hypothetical scenario different from the questions addressed in our
report. Appendix I provides additional detail on that study, which
indicated a significant impact on the petrochemical industry if
EPACT's replacement goal was met in 2010. According to industry
officials and experts, the petrochemical sector is likely to reduce
its propane consumption if the price of propane rises because a
significant portion of the propane that sector uses can be replaced
with other feedstocks, such as naphtha and ethane. However, these
officials also told us that switching feedstocks would also lead to
increases in the prices of the substitutes, resulting in an increase
in the industrial consumers' production costs. These industry
officials believe that if EPACT's replacement goal is met, the likely
consequences on their industry will be severe.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :7
We provided a draft of this report to DOE for review and comment.
DOE agreed with our findings and provided some technical
clarifications where appropriate.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8
To determine whether and how including propane as an alternative fuel
under EPACT will affect the supply, price, and existing consumers of
propane, we asked EIA to use its National Energy Modeling System to
estimate the likelihood of achieving EPACT's fuel replacement goal
and to estimate the potential impact. (See app. II for more
explanation of the modeling of EPACT's effects.) We asked EIA to
include in the analysis all of the mandates in EPACT that require
federal and state governments as well as fuel providers to procure
AFVs for their fleets, including the mandates for private and
municipal fleets that have not gone into effect.\17 We also
interviewed officials of the propane and oil industries,
manufacturers of AFVs, companies that convert conventional vehicles
to AFVs, the alternative fuels infrastructure industry, and relevant
DOE and EIA officials for their perspectives on likely effects of
EPACT. We also reviewed the EPACT documents as well as studies by
DOE and others that deal with EPACT and alternative fuels.
We conducted our review from February through September 1998 in
accordance with generally accepted government auditing standards.
--------------------
\17 As mentioned previously, DOE has until January 1, 2000, to issue
a rulemaking on whether private and municipal fleet operators will be
required to purchase AFVs.
---------------------------------------------------------- Letter :8.1
We will send copies of this report to interested congressional
committees and the Secretary of Energy. We will also make copies
available to others upon request.
Please call me at (202) 512-3841 if you have any questions. Major
contributors to this report are listed in appendix III.
Susan D. Kladiva
Associate Director, Energy,
Resources, and Science Issues
RESULTS FROM PREVIOUS DOE STUDIES
=========================================================== Appendix I
The Department of Energy (DOE) has conducted several studies of the
Energy Policy Act of 1992 (EPACT). The scope of these studies is
broader than the objectives of our report in that these studies went
beyond the mandated fleet measures analyzed in our report. For
instance, these studies estimated impacts of actually reaching the
EPACT replacement goal, as well as impacts of other policy
initiatives. This appendix summarizes some of the information three
of these studies provide on the barriers to the widespread use of
alternative fuels and on implications for the future use of
alternative fuels.
REPLACEMENT OF GASOLINE WITH
ALTERNATIVE FUELS IS LIKELY TO
FALL SHORT OF EPACT'S GOAL
--------------------------------------------------------- Appendix I:1
"Major transitional impediments" will have to be overcome to reach
EPACT's goal of replacing 10 percent of the conventional fuel
consumed by light-duty vehicles\18 with alternative fuels by 2000 and
replacing 30 percent by 2010, according to a 1997 DOE study.\19 To
meet the 2000 goal, 35 to 40 percent of total 1999 sales of new
light-duty vehicles would have to be alternative-fueled vehicles,
according to that study. To meet the 2010 goal, sales of
alternative-fueled vehicles would have to stay in the range of 30 to
38 percent of all new light-duty vehicles sold. A 1998 draft report
by DOE's Oak Ridge National Laboratory, however, found that with the
implementation of EPACT's fleet requirements, including private fleet
mandates, alternative-fueled vehicles would make up less than 1
percent of new vehicle sales in 2000 and only 4 percent by 2010.\20
This study concluded it was unlikely that the 2000 goal will be met,
or that the 2010 goal would be met without significant new policy
initiatives. The study described the following transitional barriers
to the greater use of alternative fuels:
-- the lack of scale economies in the production of alternative
fuels and alternative-fueled vehicles,
-- the consumer costs of the low retail availability of alternative
fuels and the limited model diversity of alternative-fueled
vehicles, and
-- the slow turnover of durable capital equipment and vehicles
already on the road.
Table I.1 summarizes the Oak Ridge study's estimates of what portion
of petroleum consumption would be replaced by alternative fuels in
2010 under six different sets of assumptions. In the base case, DOE
assumed existing fleet mandates, while in the late rule case DOE
assumed a local government and private fleet mandate was added. In
either of those cases, alternative fuels would constitute less than 1
percent of light-duty vehicle motor fuel sales in 2010. The
assumptions made in the next three cases produced estimated
replacement levels between 14 and 22 percent. In the no barriers
case, DOE assumed that vehicles and fuels would be produced at
large-scale costs and that all fuels would be widely available at
retail locations. In the greenhouse gas case, DOE assumed fuel tax
reductions in proportion to the reductions in greenhouse gas
emissions from a baseline level of emissions for gasoline. In the
tax credit case, DOE assumed an ethanol tax credit would continue
through 2010. The last of the six cases was the only one in which
EPACT's goal of 30-percent replacement was achieved. In this case,
called the fuel sales mandate case, DOE assumed that the Congress
would require that retail sales of alternative fuel meet EPACT's goal
but does not describe how such a result would be mandated.
Table I.1
Fuel Shares in 2010 From the 1998 Oak
Ridge Study
(Percentage of light-duty vehicle motor
fuel sales)
Greenhouse
No gas Tax Fuel sales
Base Late rule barriers subsidy credit mandate
Type of fuel case case case case case case
----------------- ---------- ---------- ---------- ---------- ---------- ----------
Conventional 70.57 70.58 62.92 58.60 58.40 53.00
gasoline
Reformulated 29.24 29.18 22.73 19.80 19.60 17.00
gasoline
Compressed 0.10 0.10 5.22 0.10 0.10 0.10
natural gas
Ethanol (E85) 0.03 0.04 2.96 21.50 21.90 5.10
Methanol (M85) 0.04 0.06 5.81 0.00 0.00 24.80
Propane 0.02 0.02 0.36 0.00 0.00 0.00
Electricity 0.01 0.01 0.01 0.00 0.00 0.00
=========================================================================================
Alternative fuels 0.19 0.24 14.36 21.60 22.01 30.00
total
-----------------------------------------------------------------------------------------
Note: E85 is a mixture of 85 percent ethanol and 15 percent
gasoline. M85 is a mixture of 85 percent methanol and 15 percent
gasoline.
Source: The Alternative Fuel Transition: Draft Final Results from
the TAFV Model of Alternative Fuel Use in Light-Duty Vehicles,
1996-2010, Oak Ridge National Laboratory, (Feb. 27, 1998) p. 51.
--------------------
\18 Light-duty vehicles are automobiles and trucks that have gross
weight ratings of less than or equal to 8,500 pounds.
\19 The report to the President and the Congress was prepared
pursuant to section 506 of EPACT. See Replacement Fuel and
Alternative Fuel Vehicle Technical and Policy Analysis, DOE, Energy
Efficiency and Renewable Energy, Office of Transportation
Technologies (July 1997).
\20 The Alternative Fuel Transition: Draft Final Results from the
TAFV Model of Alternative Fuel Use in Light-Duty Vehicles, 1996-2010,
Oak Ridge National Laboratory, (Feb. 27, 1998). (Referred to in
this report as the Oak Ridge study.)
THE RELATIVE CONTRIBUTION OF
PROPANE IN MEETING EPACT'S GOAL
IS UNCLEAR
--------------------------------------------------------- Appendix I:2
Although the Oak Ridge study suggests only a minimal role for propane
in meeting EPACT's goal, in January 1996, DOE issued a report on the
feasibility of producing sufficient replacement fuels to meet EPACT's
10- and 30-percent goal. This study indicated a potentially major
role for propane.\21 In it, DOE examined two scenarios:
-- the low oil price scenario, which assumed that the Organization
of Petroleum Exporting Countries (OPEC) was not able to exert
monopoly control over crude-oil pricing in 2010 and
-- the reference oil price scenario, which assumed that OPEC
exerted partial monopoly power over the pricing of crude oil.
Under the low oil price scenario, the world oil price would be $20.60
per barrel; the U.S. price, $21.60. Under the reference oil price
scenario, the world oil price would be $25.82 per barrel; the U.S.
price, $26.74 per barrel.\22
For each scenario, DOE examined various possible cases, including the
following four. In the benchmark case, DOE assumed that all fuels
would be taxed at the same dollar-per-Btu rate, specifically the
gasoline tax rate in 1994. It assumed that no well-developed
infrastructure for alternative transportation fuels would exist and
that alternative-fueled vehicles would be in use by organizations
covered by EPACT's fleet requirements and state mandates, while
households would continue to rely on gasoline-fueled vehicles. In
the unconstrained case, DOE assumed that a well-developed
infrastructure for alternative transportation fuels and vehicles
would exist in a long-run situation. In the limited imports case,
DOE assumed that at least one-half of alternative fuels used would be
produced from within the North American Free Trade Agreement
countries. In the letter-of-the-law case, DOE not only assumed
limited imports but also assumed that overall petroleum replacement
would equal 30 percent. Table I.2 summarizes the results from this
study for light-duty vehicle fuel use under the low oil price
scenario. Somewhat higher replacement percentages occurred under the
unconstrained and limited imports cases in the reference oil price
scenario. Propane consumption was higher for the unconstrained and
limited imports cases but slightly lower for the letter-of-the-law
case under the reference oil price scenario.
Table I.2
Light-Duty Vehicle Fuel Use in 2010 From
DOE's 1996 Study
(Millions of barrels of gasoline-
equivalent per day)
Benchmark Unconstrained Limited imports Letter-of-
Type of fuel case case case the-law case
----------------- ---------------- ---------------- ---------------- ----------------
Conventional 4.029 3.175 3.185 3.343
gasoline
Reformulated 3.815 2.711 2.705 2.847
gasoline
Compressed 0.041 0.250 0.267 0.220
natural gas
Ethanol (E85) 0.023 0.023 0.023 0.023
Methanol (M85) 0.035 0.817 0.805 0.740
Propane 0.031 1.059 1.034 0.866
Electricity 0.092 0.092 0.092 0.092
=========================================================================================
Total 8.066 8.127 8.111 8.131
Replacement 12.4% 33.2% 33.0% 30.0%
percentage
-----------------------------------------------------------------------------------------
Note: E85 is a mixture of 85 percent ethanol and 15 percent
gasoline. M85 is a mixture of 85 percent methanol and 15 percent
gasoline.
Source: Assessment of Costs and Benefits of Flexible and Alternative
Fuel Use in the U.S. Transportation Sector, DOE, (Jan. 1996) p.
91.
The importance of propane as an alternative fuel differed in the 1996
study and the Oak Ridge study because of the 1996 study's use of
lower cost figures for liquified petroleum gas. According to the
authors of the Oak Ridge study, had they also used these lower costs,
they would have reported a 28-percent displacement of gasoline by
alternative fuels in 2010 versus the 14-percent figure they reported
in the no barriers case. Of this 28-percent displacement, propane
would have constituted about half. The 1996 study estimated that
propane would account for 47 percent of the fuel displaced by
alternative fuels.
In its 1996 study, DOE found, under its low oil price scenario,
potentially significant impacts on the propane market once all
transitional barriers to alternative fuels were overcome. As seen in
table I.3, when comparing the benchmark and unconstrained cases,
liquified petroleum gas consumption by motor vehicles rises from
0.042 million to 1.450 million barrels per day in 2010. At the same
time, consumption by the petrochemical industry falls from 0.333
million barrels per day to 0. The remaining liquified petroleum gas
consumption, categorized as "nonvehicle end use" (such as residential
heating and cooking), decreases from 1.742 million to 1.710 million
barrels per day. Under the benchmark case, propane supplied by
refineries and gas processing plants were somewhat lower in the
reference oil price scenario than the low oil price scenario, whereas
non-Canadian imports were higher under the reference oil price
scenario. In both the reference and low oil price scenarios, the
direction of change in values between the benchmark and the other
cases were similar.
Table I.3
Propane Consumption and Supply Estimates
in 2010 From DOE's 1996 Study
(Millions of barrels per day)
Benchmark Unconstrained Limited imports Letter-of-
Consumption case case case the-law case
----------------- ---------------- ---------------- ---------------- ----------------
Nonvehicle end 1.742 1.710 1.694 1.714
use
Petrochemical 0.333 0.000 0.000 0.000
Vehicles 0.042 1.450 1.416 1.186
Supply
-----------------------------------------------------------------------------------------
Refineries 0.629 0.776 0.751 0.770
Gas processing 0.950 0.961 0.997 0.961
Canadian imports 0.000 0.216 0.230 0.140
Non-Canadian 0.538 1.207 1.132 1.030
imports
-----------------------------------------------------------------------------------------
Source: Assessment of Costs and Benefits of Flexible and Alternative
Fuel Use in the U.S. Transportation Sector, DOE, (Jan. 1996).
Table I.4 summarizes the effect of these changes in consumption and
supply on propane prices as estimated in the 1996 report. By
contrast, the Oak Ridge study reported no increase in propane prices,
except in the case of a fuel sales mandate, under which the liquified
petroleum gas price rose less than 2 percent.
Table I.4
Price Estimates for 2010 From DOE's 1996
Study
(Dollars per gallon of gasoline-
equivalent)
Benchmark Unconstrained Limited imports Letter-of-
Type of fuel case case case the-law case
----------------- ---------------- ---------------- ---------------- ----------------
Low oil price scenario
-----------------------------------------------------------------------------------------
Conventional $1.23 $1.21 $1.24 $1.20
gasoline
Reformulated $1.32 $1.31 $1.35 $1.30
gasoline
Propane $1.10 $1.17 $1.21 $1.16
Reference oil price scenario
-----------------------------------------------------------------------------------------
Conventional $1.35 $1.33 $1.37 $1.29
gasoline
Reformulated $1.44 $1.43 $1.47 $1.40
gasoline
Propane $1.15 $1.20 $1.26 $1.19
-----------------------------------------------------------------------------------------
Notes: Fuel consumption in terms of gasoline-equivalent gallons was
computed by dividing the adjusted lower heating value of the
alternative fuel (thousands of Btu per native unit of fuel) by the
lower heating value of gasoline and multiplying this result by the
alternative-fueled consumption value.
Reformulated gasoline contains additional oxygen and burns more
cleanly than conventional gasoline.
Source: Assessment of Costs and Benefits of Flexible and Alternative
Fuel Use in the U.S. Transportation Sector, DOE, (Jan. 1996) pp.
77 and 90 .
In comparing the overall results of these two studies, the Oak Ridge
authors noted that their results were "in marked contrast to DOE's
1996 long-run analysis, which concluded that if the necessary
infrastructure for a mature alternative fuel and vehicle industry
were present, then alternative fuels, as a group, appear likely to
sustain a 30-percent market share under equilibrium conditions." The
Oak Ridge report went on to state, "However, the modeling results
here suggest that the necessary infrastructure may not evolve
smoothly, and fuel and vehicle prices may not benefit from economies
of scale in the absence of additional
policies . . .."\23
--------------------
\21 The study was prepared pursuant to section 502(a) of EPACT. See
Assessment of Costs and Benefits of Flexible and Alternative Fuel Use
in the U.S. Transportation Sector, (Jan. 1996). (Referred to as
the 1996 study.)
\22 All prices are in 1990 dollars.
\23 Oak Ridge study, p. 22.
ESTIMATING THE EFFECT OF EPACT'S
FLEET MANDATES
========================================================== Appendix II
This appendix describes the Energy Information Administration's (EIA)
methodology for estimating the effect of EPACT's purchase mandates
for alternative-fueled vehicles (AFV) on the replacement of petroleum
fuels used by motor vehicles in the United States and on the demand,
supply, price, and existing consumers of propane.
As a starting point, we asked EIA to use its National Energy Modeling
System (NEMS) to estimate the likelihood of achieving EPACT's goals
of displacing 10 percent of the petroleum motor fuel used in the
United States by 2000 and 30 percent by 2010 by implementing all the
mandates placed on "covered" fleets (i.e., those bound by the EPACT
mandates) to purchase an increasing percentage of AFVs. We also
asked EIA to use NEMS to model the effect of including propane as an
alternative motor fuel under EPACT on the demand, supply, price, and
existing users of propane. EIA developed and maintains NEMS to
forecast the effects of energy policies or programs and changing
world energy market conditions on the U.S. and world energy
markets.\24
--------------------
\24 For more information on NEMS, see The National Energy Modeling
System: An Overview, DOE/EIA-0581 {96}, (Mar. 1996).
ESTIMATING EPACT'S EFFECT ON
FUEL DISPLACEMENT
-------------------------------------------------------- Appendix II:1
To estimate what percentage of petroleum motor fuel will be replaced
by alternative fuels in the United States, EIA used the
Transportation Demand Module of NEMS to model the effect of AFV
acquisitions by the various covered fleets on the consumption of
alternative fuels and calculated the percentage of displaced
conventional fuel that this represents. EIA assumed that covered
fleets will basically meet their legislative requirements for AFVs by
purchasing the minimum percentage mandated by law. According to EIA
officials, its analysis has found that the economics of AFV purchases
do not justify exceeding the minimum percentage. It therefore
estimated the impact of the fleet mandates by including in NEMS the
minimum percentage required for each fleet category in each year
specified. EIA used the reference case in its Annual Energy Outlook
1998 as a projection of the most likely future trends in energy
markets and the U.S. economy.\25
To estimate the impact of EPACT's AFV mandates on the demand, supply,
and price as well as on existing consumers of propane, EIA performed
a special run of NEMS (otherwise known as the GAO case) that
basically removed propane-fueled vehicles from consideration, leaving
everything else constant, including the assumption that the minimum
required percentage of AFV purchases would be made in each fleet
category. For each variable of interest, the results of the GAO case
were then compared with the reference case in the Annual Energy
Outlook 1998 and the difference calculated to determine the estimated
impact. For example, to estimate the impact of EPACT mandates on
propane use, the difference in propane use between the GAO case and
the reference case was computed.
--------------------
\25 The reference case included 1997 through 2010 figures, all
projections.
DETAILED ASSUMPTIONS AND OTHER
EPACT PROVISIONS INCORPORATED
IN THE MODEL
-------------------------------------------------------- Appendix II:2
In using NEMS to model the effects of EPACT, EIA made the following
assumptions concerning how the provisions of EPACT are incorporated
in the model. The fleet AFV purchases necessary to meet the EPACT
regulations were derived based on the mandates as they currently
exist as well as the Commercial Fleet Vehicle Module calculations.
The federal AFV program went into effect in fiscal year 1993 but,
generally, the mandates for state and alternative fuel provider
fleets were delayed until 1997 because, according to a DOE official,
DOE did not issue the rulemaking, as required by EPACT, early enough
for the mandate to take effect in 1996. Specifically, it is assumed
that each fleet category will meet its AFV mandate by purchasing the
minimum percentage of AFVs required by EPACT for that fleet category.
Table II.1 presents the percentages used by EIA's NEMS for AFV
purchases for each fleet category and model year, and the mandates
for municipal and private fleets still subject to rulemaking. Table
II.2 presents the total projected AFV purchases by fleets.
Table II.1
Percentages Used by EIA's NEMS for AFV
Purchases by Fleet Type and Year
Municipa Fuel Electric
l and provider utilities\
Year private Federal State s a
------------------ -------- -------- -------- -------- ----------
1996 - 25 - - -
1997 - 33 10 30 -
1998 - 50 15 50 30
1999 - 75 25 70 50
2000 - 75 50 90 70
2001 - 75 75 90 90
2002 20 75 75 90 90
2003 40 75 75 90 90
2004 60 75 75 90 90
2005\b 70 75 75 90 90
----------------------------------------------------------------------
\a Electric utilities fall under EPACT section 501, which provides
mandates for fuel providers. However, electric utilities are a
separate category for the purposes of this analysis because the
Congress stipulated in section 501(c) that electric utilities are
excluded from the vehicle purchased mandates until calendar year 1998
with respect to electric motor vehicles. According to DOE officials,
the stipulation was made because electric vehicles, which are the
most likely choice for the fleets of electric utilities, are 1 to 2
years behind other types of AFVs technologically.
\b EPACT's AFV percentage requirements remain the same after 2005.
Source: Alternatives to Traditional Transportation Fuels, DOE, EIA
(1994).
Table II.2
EPACT Alternative Fuel Fleet Sales
Estimates
Fleet type 1995 2000 2005 2010
---------------------- ---------- ---------- ---------- ----------
Automobiles
----------------------------------------------------------------------
Government 0 57,065 73,572 73,990
Private 0 0 77,376 76,132
Fuel provider 0 76,614 88,218 88,720
Light trucks
----------------------------------------------------------------------
Government 0 68,021 104,660 106,988
Private 0 0 22,234 22,729
Fuel provider 0 19,304 23,738 24,266
----------------------------------------------------------------------
Note: The government fleet figures are a composite of projected AFV
purchases by federal, state, and municipal governments, weighted by
the respective EPACT-mandated minimum percentage purchase.
Similarly, the fuel provider category is the projected aggregate
purchase by fuel providers and electric utilities, weighted by their
respective minimum percentage purchase for each required by law. The
private fleet category comprises only the private fleet component of
section 507(g) since the municipal component is captured in the
government total.
Sources: Annual Energy Outlook 1998 and special NEMS run, EIA.
Although the mandates for private and municipal fleets (covered by
section 507(g) of EPACT) are not in effect yet and are still subject
to rulemaking by the Secretary of Energy, the effects of these
mandates were included in the model in order to estimate the total
effect of all the AFV acquisition provisions in the law. In the
model, the private and municipal fleet mandates do not become
effective until model year 2002, based on the schedule specified in
the law. Only fleets of 50 or more were considered (in accordance
with EPACT), and AFV purchases were categorized as cars or light
trucks. Because EPACT covers only fleets in the metropolitan
statistical areas with 1980 populations of more than 250,000, the
model excluded 10 percent of all business and utility fleets and 37
percent of all government fleets. For other than federal fleets,
EPACT covers fleets of 50 or more vehicles, of which at least 20
vehicles can be centrally fueled and are used primarily in
metropolitan statistical areas with 1980 populations of more than
250,000.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION
Charles W. Bausell, Jr., Assistant Director
Godwin M. Agbara, Evaluator-in-Charge
Leslie D. Albin, Communications Analyst
SEATTLE FIELD OFFICE
Araceli Contreras Hutsell, Evaluator
*** End of document. ***